Posts Tagged ‘Australia’

Wow, what a long strange trip it has been. This quarter has certainly been visited by the four horsemen of the apocalypse. Every time the market thinks it has seen a cataclysmic event, something new arrives on the stage. Floods in Australia, earthquakes in New Zealand and Japan, high food prices and riots in the world over, and of course there is always war breaking out somewhere. In a prior time (THINK 1960s), we had a different hedge group writing: IT’S GOOD NEWS WEEK by the HEDGEHOPPERS.

All these calamities and still the equity markets in the U.S. have rallied and the DOLLAR has failed to invoke its haven status. The only explanation I can discern from this action is that EASY MONEY from our friends at the FED has trumped all else. It seems that DOLLAR-based investors are searching for any type of investment that can yield more than inflation. Risky assets get bid up as money scours the investment map. Commodities, high-dividend yield stocks, high-yield corporate bonds are all desired.

Yet, as the Financial Times reported today, the demand for MUNI BONDS isn’t there post Meredith Whitney as the yields are insufficient to overcome the fear of default. At least GREECE pays you a true risk yield to purchase its SOVEREIGN DEBT. The end of the quarter leaves me thinking that the FED and all the other QE-providing BANKS have so perverted the global interest markets that the decision to remove the monetary stimulus will create a great deal of volatility. The question is, when?

The coming quarter will begin to answer that question but the political stage will continue to surprise as 2012 brings forth many elections. In May, the Canadians will go to the polls and the Portuguese will follow. I am certain that other Parliamentary Governments will fall as the austerity budgets begin to take a toll on voters of many Western nations. As the quarter comes to an end, the EUR/YEN cross that has been the barometer of so much of the risk on/risk off paradigm, is breaking out to new highs since the second quarter of 2010. Is this a reflection of the G-7 intervention or merely the need for Japanese investors to seek higher yields outside of Japan?

The FT reported yesterday that several macro hedge funds suffered severe losses from the March 17 YEN rally that sent the DOLLAR/YEN rate to 76-plus. As the quarter ends, there are more questions than answers but I sincerely hope that the FED will begin to remove some of the haze that engulfs global financial markets. The politics will create volatility. Responsible central bank policies would do much to help remove some of the greater uncertainties. For many, this was certainly a “WINTER OF DISCONTENT.” Being a CUBS FAN, it is time for HOPE to SPRING ETERNAL.Hey Bernanke, PLAY BALL.

The weekend news was not economic but political as governments all over the globe suffered major setbacks. The Liberals secured a “NO CONFIDENCE” vote in the Canadian Parliament and bring down the Harper Government. I know that Michael Ignatieff will claim that he is perserving the democratic basis of Canada as the ruling party was brought down on an issue of CONTEMPT. The only thing that appears contemptuous is the ego of Ignatieff. He claims that the TORIES are out of touch and out of control. The election is called for May 2 and then the electors will have the final say on who is out of touch. This will be the fourth general election in seven years and let’s hope the citizens of Canada show their anger and elect an outright majority so Canada can get on governing itself.

Let me state out again as to why the FOREX markets are going to be a difficult investment in 2011. The emerging markets and commodity-based currencies have been the repositories of global capital seeking to take advantage of the Chinese and India growth phenomena without having to actually invest in the countries themselves. If you like China, buy the Australian equity or currency as it provides a proxy on Beijing’s growth policies: A classic case of providing picks and shovels rather than mining yourself.

During the last two days the markets have heard from the Australian and Canadian central banks and both institutions held its rates steady. Both banks cited its strong currencies and the still-fragile state of the global economy outside of emerging Asia as the primary reasons for holding. (more…)

Last night, the RBA voted to hold Australian rates steady at 4.75 percent. Governor Stevens showed us his usual, steady hand in the BANK‘s statement as he provided us with a global view that weighed heavily on Aussie monetary policy. The strength of the Aussie dollar kept the RBA from raising rates as the bank had unexpectedly raised rates in November and was content to see if the U.S. and European economies can overcome their current malaise. The Chinese and Indian demand were responsible for the best terms of trade for OZ since the 1950s and growth in other Asian nations was brightening the jobs and capex picture even more. In a few paragraphs, Governor Stevens and his comrades are very clear that Australia is the epicenter of the Asian growth story and the RBA will be watching for indicators that Australian employment is getting too tight for the BANK to move rates higher.

The labor day period ended and the markets returned to risk-off profile as the media was awash with stories about the European stress tests being flawed. It seems that some analysts have awoken to the fact that the European tests were curved so as not to be overly bogged down by sovereign debt issues. There is nothing new to this as we talked about the flaws in the tests when they were administered, but the market ran with the “story” anyway and so we had a day of risk off. In addition to the Euro stress tests there was some softer German manufacturing data, which aided the equity selloff and, of course, put downward pressure on the EURO and other non-dollar currencies. The YEN, SWISS FRANC and GOLD were the biggest beneficiaries along with the long end of the global DEBT markets.

The Japanese are certainly not happy with the YEN strength but at this time it seems like there is not a great deal that the BOJ or MOF plan to do. In a Wall Street Journal opinion piece by Naomi Fink, who we consider to be a first-rate analyst, argues that the appreciating YEN may well be a blessing for the Japanese. We don’t agree with her analysis at the present time, but we think she raises many interesting points and is certainly worth reading and considering.

Tomorrow morning we will hear from the Bank of Canada. The market is mixed about the probability of a rate rise–overnight rates are currently 75 basis points and it’s 50/50 that they will raised to 100 basis points. As with Australia, we will read the statement carefully. The latest data in Canada has been mixed but the BOC has been desirous of getting ahead of the curve but we want to see if the lack of U.S. growth causes the Canadians to hold rates since they remain cautious because of slowness in the other developed countries.

A reader of ours raised a question about the reason Larry Summers is in China during recent economic policy headlines from the OBAMA administration. The point raised was that Summers may be there to inform the Chinese that there are plans to refinance MBS mortgages and because China holds a great deal of that paper they want to let them know what the plans are and the potential impact the REFINANCE will have on the Chinese. Maybe a mark down of MBS is a far less painful path than to have tariffs and surcharges imposed on Chines imports. Senator Schumer is banging the drums louder for Chinese revaluation, which will benefit no one but send fears of an impending trade war. We stress again that the biggest bang the Obama administration can get would be a massive refinance plan, which would result in much lower monthly mortgage payments and aid millions of people who are currently underwater on their homes but would stay current with a much lower monthly payment.

Renowned investor Wilbur Ross added more support to this argument. Ross, who has invested heavily in the finance business in the last two years believes that the government should aid homeowners to avoid “negative equity rat holes.” In an interview, Ross said “holders of MBS securities should get tax benefits for giving borrowers better terms.” Yes, we know that ROSS and his companies will come out to the good but we only care if the policy makers latch on to this concept. Mortgage relief is what is needed to halt the rise in foreclosures, which is putting even more pressure on bank balance sheets and thus tying up the securitization market. Credit will not flow until banks have some sense of certainty that the downward pressure on residential real estate is abating. The effort to stem the balance sheet recession has to begin somewhere. Why not mortgage relief? Drips and drabs of tax relief will not prevent further write downs or get credit flowing, for as the market asked today: Is that all there is?

The unemployment data has become much more difficult to trade as the breakdown of information is filled with so much countervailing data. We need to look at the private sector job creation as the census jobs roll down, then the average hours worked because average hourly earnings take on more importance as an indicator of possible increased consumer spending. However, the overall jobless rate may stay the same or go higher. The consensus number for non-farm payrolls is 105,000 lost , but we caution to wait for the full breakdown before getting too excited.

The global equity markets in the northern hemisphere wilted in the hot August sun. The bears were not in hibernation but foraging on the uncertainties of a global recovery. Risk-off trades were the central theme of the month and the rush to safety was en vogue. The yen and Swiss franc were the strongest currencies of the developed world. The YEN is impacting Japanese growth and it is certainly reflected in the NIKKEI, which was down more than 7 percent for the month. Many commentators still believe that the strong YEN is not that severe a problem for Japan, but as our readers know that is not our view, especially in regards to the EURO. Bloomberg ran a story today about Japanese concerns regarding the failed stimulus plans of Prime Minister Kan. Several of the giant Japanese corporations are openly complaining about the strong YEN and its impact on profits. Canon, Nissan and Panasonic said they would be moving production outside of Japan. Toshiyuki Shiga, Nissan’s chief operating officer, said,” The number one priority is to curb the strengthening yen.”

This weekend was a slow news weekend for impact-worthy events. The Chinese PMI data was somewhat tepid but not as weak as expected. Again, we state that we don’t trust the Chinese data at all. We must remember how the U.S. data is so badly flawed, so why should we trust the economic releases of an economy that is so ostensibly government controlled? Good, bad or ugly, we have very little respect for Chinese data. We hope we are clear on that but we report it only for the initial impact it can have on trades.